Lender not required to stop borrowers from making bad investment, court rules

A bank has no extra fiduciary duty to a customer if the relationship between them is an ordinary  lender-borrower arrangement, a North Carolina Business Court judge has ruled.

Judge James L. Gale, in Wells Fargo v. VanDorn, decided that the buyers of mountain real estate did not ask for, nor receive, advice about their purchase from Wells Fargo, and therefore could not later claim the bank had breached a fiduciary duty.

In VanDorn, the defendants purchased a lot in a gated-resort community in Watauga County called Laurelmor, using Wells Fargo – the preferred lender for the development – for their financing.

In 2011, Wells Fargo sued on the note executed by the defendants, the proceeds from which they used to purchase the lot. The defendants counterclaimed, alleging breach of fiduciary duty and negligence, based upon their dealings with the bank in connection with the loan and upon an alleged long-standing banking relationship one of the individual defendants had with a Wells Fargo Wealth Management Officer.

They alleged that Wells Fargo did not act in their best interests, failed to advise them to retain independent counsel, used an appraisal it should have known was inflated and failed to inquire into their ability to repay the loan.

Gale dismissed the counterclaims, finding that defendants’ dealings with Wells Fargo did not rise to the level of “domination and influence” inherent in a fiduciary relationship.

“Only when one party figuratively holds all the cards – all the financial power or technical information, for example – have North Carolina courts found that the ‘special circumstance’ of a fiduciary relationship has arisen,” Gale wrote.

Here, the judge noted, the facts alleged describe no more than the typical borrower-lender relationship:

“Defendants do not allege Plaintiff or its employees located, identified, or recommended the lot, or that the lot purchase was part of a broader financial plan that Plaintiff had developed for defendants. Defendants do not allege the defendants sought investment advice regarding the lot transaction. To the contrary, Defendants’ allegations indicate that plaintiff became involved in the lot transaction after defendants had located the lot, formed the intention to purchase the lot, formed the company to facilitate the purchase and approached plaintiff about financing the transaction.”

Gale also found that in the absence of a fiduciary duty, Wells Fargo owed no separate duties, beyond those set forth in the loan agreements, giving rise to a negligence claim.  Defendants alleged no facts that would justify imposing liability for the appraisal, which is typically obtained for bank’s benefit in any event.

Nor did defendants allege any facts supporting liability for their own inability to understand the meaning and import of the loan documents, which were replete with cautionary language.

In the end, Gale wrote, defendants were unfortunately casualties of the market and not victims of any misdeeds by their lender:  “This is yet another case where investors in resort development property have suffered substantial losses following the economic downturn. There is, however, no demonstrable basis for shifting that loss to the lender.”

Opinion Brief

Case name: Wells Fargo Bank v. VanDorn et al.,

Court: N.C. Business Court

Judge: James L. Gale

Attorney for plaintiff: W. Clark Goodman, Amanda W. Anders, Womble Carlyle (Charlotte)

Attorney for defendants: Jennifer N. Fountain, Issacson Issacson Sheridan & Fountain (Greensboro)

Issue: Can a lender be liable for breach of fiduciary duty and/or negligence arising out of a typical lender-borrower transaction?

Holding: No, not without facts establishing a relationship beyond that of traditional lender-borrower roles or documents imposing specific duties.

Effect: The assessment and viability of a breach of fiduciary duty and/or negligence claim by a borrower against a lender remains fact-specific.